3. LO.2 On July 1, 2013, Rex purchases a new automobile for $40,000. He uses the

Question

3. LO.2 On July 1, 2013, Rex purchases a new automobile for $40,000. He uses the car 80% for business and drives the car as follows: 8,000 miles in 2013, 19,000 miles in 2014, 20,000 miles in 2015, and 15,000 miles in 2016. Determine Rex's basis in the business portion of the auto as of January 1, 2017, under the following assumptions a. Rex uses the automatic mileage method. Rex uses the actual cost method. [Assume that no § 179 expensing is claimed and that 200% declining-balance cost recovery with the half-year convention is used-see Chapter 8. The recovery limitation for an auto placed in service in 2013 is as follons $3,160 (first year), $5,100 (second year), $3,050 (third year), and $1,875 (fourth year) b.

Explanation / Answer

a. Under the automatic mileage method: Rex can claim 56.5 cents - 2013, 56 cents in 2014, 57.5 cents in 2015 and 54 cents in 2016. He is using 80% of the car for business and hence 80% of each years' miles will be deemed to use for business.

Therefore total amount deducted will be = (8000 x 80% x 56.5) + (19000 x 80% x 56.5) + (20000 x 80% x 57.5) + (15000 x 80% x 54) = 2,788,400 cents or $ 27,884.

Therefore Rex's basis in automatic mileage as on 1 Jan 2017 will be = 40000 - 27884 = $12116.

b. As per the actual cost method:

Depreciation basis = Cost x % used in business = 40000 x 80% = $ 32,000

Since half year convention is used, Depreciation for 2013 = 32,000 x 20% x 50% = 3200 but limited to 3160

Dep for 2014 = (32000 - 3160) x 20% = 5768 but limited to $5100

Dep for 2015 = (32000 - 3160 - 5100) x 20% = 4748 but limited to 3050

Dep for 2016 = (32000 - 3160 - 4100 - 3050) x 20% = 4338 but limited to 1875

Therefor Rex basis in business portion of automobile = (32000 - 3160 - 4100 - 3050 - 1875) = 19815

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